Megathreats
Nouriel Roubini   

Summary

A somewhat depressing but also eye opening book about the major threats that face our world the next decade.

Rating: 4/5

Notes

We are facing a regime change from relative stability to an era of severe instability

The megathreats we face will reshape our world. Change is coming, like it or not

1: the mother of all debt crises - the whole world has way too much debt

• Debt denominated in foreign currencies cripples a country’s ability to service and repay its international loans
• Consensus groupthink often rules amongst the world’s elites
• Borrow to invest, not to consume
• Private debt can be just as destructive, if not more so, than public debt
• What we owe, not what we own, will govern our status

2: private and public failures:

• Higher spread in bond yield relative to US T-bond, the more the market is expressing doubt in the bond issuer’s solvency
• Zombie companies are hiding an uncomfortable truth about the global economy
• When taxpayers are on the hook, moral hazard privatizes gains and socializes losses
• Defaults as a way of resolving debts are ugly business - it’s going to get nasty
• When interest rates go up, bond prices go up and vice versa
• We don’t want to face the truth, we are in a perpetual state of denial

3: the demographic time bomb

• ‘If the US goes broke and descends into chaos and generational conflict, the whole world will suffer probably in ways none of us can, or want to, imagine’
• Watch for headlines of generational conflict b/w young and old as young workers get taxed increasingly to bankroll retirees. They give up their future to old people to pay for their pensions and social services
• Legacies of comprehensive social welfare proframs leave Europe and Japan with the steepest hills to climb
• One solution to boost productivity growth is accelerating the immigration of younger workers
• Freer immigration has a more positive net impact on GDP than liberalizing trade, movements or capital or financial services

4: The easy money trap and boom/bust cycle

• Wherever you have a casino full of nearly free money, it leads to a volatile bubble
• Giving more drugs (easy and cheap money) to an addict in withdrawal reduces the short ter pain but makes the addiction worse or even fatal over time
• Now we are trapped with no solution that comes without a lot of pain
• Monetary easing fuels asset bubbles
• Since the Greenspan put, Bernanke Put, Yell Put and Powell put, investors know - when debt and equity markets wobble, central bankers will come to the rescue

5: the coming great stagflation

• Those who cannot remember the past are condemned to repeat it - George Santagon
• Prepare to revisit the 70s and dust off the misery index (unemployment + inflation). It’s at 10 in 2022 with inflation at 8%
• Trade deficit ballooned in the 70s as corporations with weaker currencies and high growth could sell products for less than domestic American companies thereby decreasing exports, increasing imports and reducing the competitiveness of local companies
• Stagflation in the 70s can be explained by oil shocks with misguided policy responses that relaxed restraints on inflation expectations
• When trouble is imminent, smart people often brush off the downside
• During the 70s, we had an inflation problem but not a debt problem. Now we have both

6: Currency meltdowns and financial instability

• As central banks, like the US fed, are drawn into the pursuit of foreign and national security policy, they are weaponziing the dollar and the value of our currencies are at stake
• The sanctions placed on Russia for the war will accelerate many countries to move away from a dollar-based financial system
• Italy is currently the weakest link in the Eurozone. If it falls, the EU likely falls. Italy is too big to fail and too big to save
• Currencies function as a unit of account, a scalable and widely used method of payment, a stable ‘store of value’, a stable value relative to an index of goods and services - crypto is none of these things so is not a currency
• The gini coefficient of bitcoin (measure of wealth inequality) is more than North Korea

7: The end of globalization

• We traded good jobs with strong wages for cheap imports at big box retailers
• The new cold war b/w China and it’s allies vs. the US and west is accelerating
• Globalization redirects wealth to the top and exacerbates inequality. We haven’t compensated those left behind in advanced economies as a result of free trade
• Building a social safety net and a welfare state for workers prevents upheaval and revolutions
• Displacement and rising inequality need urgent attention by policymakers in civilized societies, for self preservation if not for nobler reasons
• Data will become an asset as, it not more, valuable than goods and services

8: the AI threat

• ‘Every step forward is made at the cost of menstrual and physical pain to come’ - Nietzsche 
• Wealth inequality is running out of control in the US and AI only accelerates that as the benefits will mostly go to the top

9: the new cold war between China and the US

• China’s belt and road initiative (BRI) built infrastructure across Asia, Africa and Latin America using Chinese loans and when countries can’t pay back the loans, the Chinese seize infrastructure
• The Chinese economy is a system of state capitalism where the arbiter is uncontestable political authority
• China is not moving towards the West and co-operation, it’s moving away
• The West must adjust its mindset - China is on track to become the world’s dominant power

10: an uninhabitable planet

• 10% of the world’s population lives near a coastline and are at risk of rising sea levels
• Emerging economies like India and China expect to increase emissions to 2030 and blame global climate change correctly on advanced economies
• Climate change increases the spread of pandemics as animals and humans interact more frequently
• There is no free lunch in the transition to green energy

Like a cancer that ravages bodies, megathreats will wreak havoc on global infrastructure and current wold order. Expect many dark days

We have borrowed our way to prosperity with no exit strategy

Megathreats will rock our world in sobering ways

Invest in short term bonds, gold/commodities and real estate with limited supply + some cash in case stocks crater

Unexpected growth and solving the energy problem could be 2 solutions to avoid disaster

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